ESG ratings in Germany

Transcription

1 ESG ratings in Germany Survey among investor relations & institutional investors Frankfurt/ Hamburg, December 2018

2 Why this study? HBS First Evidence on Materiality (2015): Firms with good sustainability performance significantly outperform those with poor performance. Friede, Busch & Bassen (2015): "ESG pays" good social performance correlates with good company performance. Larry Fink, BlackRock: Sustainable Investing will be a core component of investing we are only in the early stages. Global Sustainable Investment Alliance: AuM under ESG criteria >$23tr (+60% compared to 2012). ESG funds launched globally ~ 372 (2017) vs. ~ 140 (2012). EPIC Embankment Project for Inclusive Capitalism (founded 2018 by BlackRock, Vanguard): push companies to disclose hard-to-quantify items.

3 DIRK survey on ESG ratings in Germany background and approach Investor Relations Officers (IROs) experience continuous increase in demand to comment on ESG evaluations and answer ESG questionnaires. Growing amount of IROs time needed for gathering data and checking evaluation results, while value not always obvious. Objective of survey conducted by DIRK, DVFA and Schlange & Co. ( S&C ): Evaluate the opinion of IROs and institutional investors ( II ) on ESG rating agencies and the value of rating results. Survey carried out 3 weeks in September 2018 with sample of approx IROs, IIs and 8 ESG rating agencies.

4 Executive summary

5 Key findings (1/2) Response rate high with 167 IROs and 94 IIs; Number of Don t know answers regarding ESG rating agencies evaluation approach was high. Half of IROs and IIs believe that sustainability is of high importance for a company s overall performance and they expect this to further gain in importance. The majority of respondents believes that sustainability produces tangible value and increases operational efficiency. The most important criteria for evaluating a company s sustainability performance are meaningful KPIs and a resilient strategy with concrete objectives. The majority of IROs prefers in-person discussion as a communications channel, while most investors prefer communication via print or electronic media. IROs mostly refer to missing information as reason for poor ESG communication, while most IIs believe that this is due to IROs lacking interest or poor preparation.

6 Key findings (2/2) Many IIs and ESG rating agencies believe that only a minority of IROs is sufficiently aware about sustainability and the company s ESG performance; IROs don t seem to always have a clear management mandate to report transparently. MSCI and ISS-oekom appear to be the most relevant rating agencies; their research is commented by most IROs and is used by the highest number of IIs. IROs rank RobecoSAM highest followed by ISS-oekom and CDP based on the criteria: quality, added value, coverage, presentation, interaction and innovation. IIs rank MSCI the highest followed by ISS-oekom and Sustainalytics based on the same criteria. The role of CDP as both - rating agency and data supplier to other rating agencies - is not sufficiently understood.

7 Conclusion Given the increasing importance of ESG in capital markets an active approach towards ESG ratings can only be encouraged; companies hesitating to do so run the risk of becoming excluded as an eligible name for institutional investors. Therefore, it is strongly recommended that IROs become more familiar with their own company s sustainability performance, with IIs approach with regard to ESG in the asset allocation process, and with the work of ESG rating agencies. The added value for companies is increasingly being demonstrated by lower financing cost and/ or increased operational performance.

8 The overall importance of sustainability

9 Most respondents consider sustainability of high importance with regard to companies performance 45% 40% 35% How important is sustainability with regard to a company s performance in general? 39,8% 33,8% 128 Votes 30% 25% 20% 15% 10% 5% 0% 10,9% 14,3% 25,8% 19,6% 14,8% 12,5% Very high importance High importance Medium importance Low importance Very low importance Not at all 6,3% 14,3% 1,7% 3,6% 56 Votes Investor Relations Institutional Investor

10 Sustainability will continue to gain in importance in the future Will good sustainability performance gain in importance in the future? 90% 80% 70% 86,7% 82,1% 128 Votes 60% 50% 40% 56 Votes 30% 20% 10% 0% 14,3% 5,5% 3,6% 5,5% 2,3% Yes No Uncertain I do not know Investor Relations Institutional Investor

11 The majority of respondents believes that sustainability produces tangible value Good sustainability performance does Investor Relations (128 Votes) Institutional Investor (56 Votes) create long-term shareholder value. 88,3% 6,2% 5,5% 76,8% 12,5% 10,7% I agree I do not agree I do not know I agree I do not agree I do not know increase operational performance. 64,1% 18,7% 17,2% 64,3% 19,6% 16,1% I agree I do not agree I do not know I agree I do not agree I do not know reduce financing costs. 50% 26,6% 23,4% 57,1% 30,4% 12,5% I agree I do not agree I do not know I agree I do not agree I do not know

12 KPIs, strategy and objectives are critical for evaluating a company s sustainability performance How important are the following aspects to investors? Investor Relations (128 Votes) Institutional Investor (56 Votes) Meaningful KPIs and reporting processes 41,4% 30,5% 17,2% 10,9% 51,8% 23,2% 17,9% 7,1% Very Medium Somewhat I do not know Very Medium Somewhat I do not know Sustainability strategy with quantified objectives for each material issue 30,5% 28,9% 29,7% 10,9% 50% 23,2% 21,4% 5,4% Very Medium Somewhat I do not know Very Medium Somewhat I do not know Detailed organization, i.e. structure, names or reporting lines 13,3% 39,8% 33,6% 13,3% 28,6% 42,9% 23,2% 5,3% Very Medium Somewhat I do not know Very Medium Somewhat I do not know

13 Whereas IROs believe that ESG is of minor importance to IIs What is the percentage of investors emphasizing ESG? 70% 60% 62,5% 128 Votes Answers in % 50% 40% 30% 20% 10% 0% 26,6% 7,8% 3,1% <10% 10-50% >50% I do not know

14 the weighting reported by IIs is clearly higher What is the portion of assets managed under ESG criteria on group level? 60% 50% 55% 42 Votes Answers in % 40% 30% 20% 10% 26% 19% 0% < 10% 10-50% > 50%

15 From IROs perspective sustainability is more important for communication with management than with investors How important is ESG 50% 45% 40% 35% in your dialogue with investors? 46,1% 52% 39,1% 128 Votes for your company's top management? 63% 42,2% 34,4% 30% 25% 20% 20,3% 15% 12,5% 10% 5% 2,3% 3,1% 0% High Medium Low I do not know

16 Evaluation of ESG research agencies

17 Profiles of ESG rating agencies (1/2) Agency Profile Coverage Analysis based on Services CDP (non-profit) Founded 2000 (London) > 200 7,000 companies 620 cities 120 states/ regions Self-disclosure questionnaire Evaluation of criteria across three focus areas, distinguishing between companies and suppliers ESG ratings and research support via workshops and webinars 160 companies A-listed in 2017 Covalence SA Founded 2001 (Geneva) > 5 employees FTSE Russell (FTSE International Limited) Founded as FT-Actuaries All- Share Index in 1962 (London) > 100 employees 3,400 companies Publicly available information (web monitoring, artificial intelligence and human analysis) Evaluation of criteria across 8 areas 4,100 companies Publicly available information Evaluation of on average 125 indicators individually selected for the company s circumstances ESG ratings and research ESG ratings Green Revenues data evaluation ESG Indexes (e.g. FTSE Good) ISS-oekom/ oekom research AG Founded 1993 as oekom Research (Munich) > 120 employees 6,300 companies 726 states & regional authorities Publicly available information Interviews with company rep. s and further stakeholders Evaluation of 100 sector specific social and ecological criteria across six areas Exclusion screening of controversies ESG ratings and research 550 rated oekom Prime in 2017 Source: Agencies, S&C

18 Profiles of ESG rating agencies (2/2) Agency Profile Coverage Analysis based on Services MSCI Inc. Founded 1969 > 3,038 employees MSCI ESG Ratings Founded in 2010 as ex-innovest/ KLD (New York) > 300 employees 13,000 equity and fixed income issuers 7,500 companies Publicly available information plus formal data verification by company prior to publication of ratings Evaluation of 37 key issues across ten areas ESG ratings and research (company, industry and thematic reports, portfolio analytics, data feeds, indexes) ESG Indexes RobecoSAM AG Founded 1995 as SAM (Zurich) > 110 employees 4,500 companies 60 countries Self-disclosure questionnaire (CSA assessment) Evaluation of 19 key issues across three areas ESG ratings Sustainalytics (Sustainalytics Holding B.V.) Founded 1992 as Jantzi Research (Amsterdam) > 300 employees 9,000 companies Publicly available information (company-issued information, media analysis) Evaluation of 40 industry-specific indicators ESG ratings and research Vigeo Eiris (Vigeo SAS) Merger between vigeo and EIRIS > 200 employees 4,000 issuers Self-disclosure questionnaires Evaluation of 38 criteria across six areas ESG ratings and research strategic support Source: Agencies, S&C

19 MSCI and ISS-oekom are the most favored ESG rating agencies by IROs and IIs Which are the rating agencies you buy ESG research from?* (II) Which ESG rating requests do you answer?* (IRO) 60% 50% 40% 30% 20% 10% 0% Votes: 42,6% 53,2% 31,2% 57,6% 14,8% 51,8% 51,8% 8,2% 8,2% 30,9% 3,3% 27,3% 1,6% 1,4% 1,6% 28,1% 23,0% 16,4% 15,8% 15,8% ,2% 61 Votes 139 Votes 5,8% MSCI ISS-oekom Sustainalytics CDP Vigeo Eiris FTSE Russell Covalence RobecoSAM None Other I do not know Institutional Investors buying reports Investor Relations answering/commenting evaluations *Multiple answers possible

20 Evaluation of ESG research firm s quality (IRO s perspective) ,4 42,7 42,1 41,3 39,3 39,3 38,3 Score , Maximum score per category is 10 points (max. 60 points in total)

21 Evaluation of ESG research firm s quality (II s perspective) , ,8 33,8 31,1 30,7 30,5 Score ,3 0 Maximum score per category is 10 points (max. 60 points in total)

22 Evaluation of ESG rating agencies IRO s perspective Category ESG Firm Quality 7,6 7,2 7,1 7,1 6,6 6,7 7,0 5,5 Added Value 7,4 7,1 7,1 7,2 6,7 6,6 6,5 4,5 Coverage 7,4 7,3 7,1 7,4 7,1 6,9 7,1 4,0 Presentation 7,4 7,2 6,7 7,1 6,5 6,4 5,9 4,3 Interaction 7,0 7,3 7,0 6,2 6,3 6,3 5,6 4,0 Innovation 7,6 6,6 7,1 6,3 6,1 6,4 6,2 5,5 Overall result 44,4 42,7 42,1 41,3 39,3 39,3 38,3 27,8 = Best in class Maximum score per category is 10 points (max. 60 points in total)

23 Evaluation of ESG rating agencies Institutional investors perspective Category ESG Firm Quality 7,7 7,8 6,9 7,0 6,4 6,7 6,8 5,0 Added Value 8,0 7,7 7,0 6,8 5,8 5,4 6,0 4,8 Coverage 7,9 7,9 7,2 6,8 6,9 6,0 6,4 5,5 Presentation 7,7 7,3 7,0 6,7 6,2 6,6 6,3 5,0 Innovation 7,7 7,5 6,7 6,5 5,8 6,0 5,0 5,0 Overall result 39,0 38,2 34,8 33,8 31,1 30,7 30,5 25,3 = Best in class Maximum score per category is 10 points (max. 50 points in total)

24 The familiarity of both, IROs and IIs with ESG rating agencies approach appears to be rather low Is the overall scope and relevance of selected topics sufficiently addressed through questionnaires? CDP RobecoSAM Vigeo Eiris Investor Relations (104 Votes) 30,8% 29,8% 7,7% 31,7% 27,9% 15,4% 2,9% 53,8% 16,3% 20,2% 2,9% 60,6% Yes Somewhat Not at all I do not know 74,5% Yes Somewhat Not at all I do not know 76,6% Yes Somewhat Not at all I do not know 76,6% Institutional Investor (47 Votes) 8,5% 13% 4,2% 4,3% 12,8% 6,4% 4,2% 14,9% 4,2% Yes Somewhat Not at all I do not know Yes Somewhat Not at all I do not know Yes Somewhat Not at all I do not know

25 Missing data and management decision are mostly named as reasons for not supplying ESG information What are the most frequent reasons for companies to withhold ESG information?* 50% 49,5% 45% 41,7% 40% 35% 30% 25% 20% 29,3% 23,2% 19,5% 16,7% 16,7% 19,5% 33,3% 25,3% 15% 10% 5% 9,5% 8,3% 9,5% 8,3% 5,3% 2,4% 0% Strategic decision by top management Lack of interest, poorly prepared Requested information not available, missing KPIs & reporting structure Not the case Other I do not know Investor Relations Institutional Investor ESG Research Firm *Multiple answers possible

26 High percentage of insufficient ESG knowledge or lack of mandate to discuss ESG What is the portion of IRprofessionals Institutional Investor ESG Research Firm who have been sufficiently trained and/or informed about sustainability and about the performance of their company? 43,9% 17,1% 4,9% 34,1% 50% 8,3% 16,7% 25% < 30% 30-75% > 75% I do not know < 30% 30-75% > 75% I do not know having a clear mandate from management to provide a transparent report on their company s sustainability performance? 39% 21,9% 4,9% 34,1% 33,3% 16,7% 16,7% 33,3% < 30% 30-75% > 75% I do not know < 30% 30-75% > 75% I do not know

27 The preferred channels for communication are print / online-report and in-person discussion Preferred channel for communication with investors/companies. 60% 50% 53,8% 59,8% 95 Votes 40% 30% 26,1% 40% 38,5% 40% 41 Votes 20% 10% 0% Printed/electronic (CSR report, website, ESG research) In-person discussion (annual general meeting, stakeholder roundtable) 11,9% 5,1% Telephone 10% 10% 2,2% 2,6% Other Investor Relations Institutional Investor ESG Research Firm 12 Votes

28 ESG rating agencies are only to a small degree prepared to negotiate from the IRO perspective (1/2) Is the rating agency willing to discuss and amend its verdict? Questionnaires (104 Votes) CDP 50% RobecoSAM 64,4% Vigeo Eiris 70,2% 22,1% 12,5% 15,4% 6,8% 17,3% 11,5% 8,6% 12,5% 8,6% Yes Somewhat Not at all I do not know Yes Somewhat Not at all I do not know Yes Somewhat Not at all I do not know

29 ESG rating agencies are only to a small degree prepared to negotiate from the IRO perspective (2/2) Is the rating agency willing to discuss and amend its verdict? Publicly available information (95 Votes) Covalence FTSE Russell ISS-oekom MSCI Sustainalytics 91,6% 73,7% 1% 4,2% 3,2% 11,6% 9,5% 5,3% 30,5% 22,1% 7,4% 40% 20% 21% 9,5% 49,5% 23,2% 2,3% 7,4% 46,3% Yes Somewhat Not at all I do not know Yes Somewhat Not at all I do not know Yes Somewhat Not at all I do not know Yes Somewhat Not at all I do not know Yes Somewhat Not at all I do not know

30 Thank you for your attention!